The emergence of cryptocurrencies into the mainstream discussion of financial investment has seen an increasing number of our clients considering whether cryptocurrencies, such as Bitcoin, may be acquired by their self-managed super fund (SMSF).
Cryptocurrencies are based on blockchain technology. Blockchain, in simple terms, is technology that allows records of truth without the need for a trusted intermediary, such as a bank. This allows information to be recorded on ledgersand verified through different users on the blockchain. This technology can be used to support cryptocurrencies, which function through blockchain systems and are similar to a digital currency.
The appeal of cryptocurrencies has a nexus with blockchain technology, as they theoretically have the potential to provide a decentralised currency that can be used as a replacement for or addition to current global currencies. This has driven interest in cryptocurrency investment and has created the need for new regulation of cryptocurrencies in Australia.
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The increasing number of investors into the cryptocurrency market in Australia is problematic for superannuation fund regulators, who now must determine how to monitor and regulate Australians who are keen to diversify their SMSF through cryptocurrencies.
The rules applied to traditional SMSF investment also apply to cryptocurrencies, with regulators focusing on whether SMSFs are providing a genuine retirement-directed investment. In determining whether SMSFs may be able to invest in cryptocurrencies, the Australian Taxation Office (ATO) will focus on two limbs:
The sole purpose test requires that a SMSF is maintained for the purpose of providing a retirement benefit for members. This limb can be satisfied where it can be shown that the individuals associated with the SMSF are not receiving any present day benefits, such as rebates or commissions, in relation to the investment.
Further, it is critical that the SMSFs cryptocurrency is held securely in a public IP address, and that evidence is maintained to show that the cryptocurrency belongs to the fund (and not to the individual who may be the registered owner).
This limits which cryptocurrencies can attract SMSF investment, with Australians opting to use more transparent currencies such as Bitcoin and Ethereum to avoid any issues of establishing currency ownership for audit purposes.
A significant issue facing crypto-investors is the high risk nature of cryptocurrencies, as SMSF trustees are required to exercise due diligence in relation to all investments made under the SMSF. Further, investment in crypto-currencies must be contemplated under the investment strategy of the fund, and perhaps under the trust deed (where that is prescriptive as to investments open to the fund).
It seems likely that SMSF investors incorporating cryptocurrencies into their investments have used cryptocurrencies to diversify their investments, rather than solely invest in cryptocurrency. It is difficult to see that a strategy allowing the whole or a substantial part of a funds assets to be invested in cryptocurrencies would be available to a prudent superannuation fund trustee.
The emergence of cryptocurrencies as a genuine financial investment has created new obstacles for SMSF regulators and investors alike, who now must navigate a volatile frontier of high risk investment and limited regulation.
The Government will inevitably provide further guidance regarding the regulation of cryptocurrencies, but until then, investors are faced with the challenge of investing in a financial asset that is not comprehensively regulated under the current legislation.
As it stands, Australians eager to diversify their SMSF with cryptocurrencies are able to do so, provided certain conditions are met. With the Government yet to provide any substantial guidance through regulation, this will be a space to watch.
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